Weekly Market Wrap: 22 February 2013 – Is this the end of the gold bull market?

This regular column reviews the condition of several markets, including stocks, commodities and precious metals. This week focuses on the Dow Jones Industrial Average, the FTSE 100, and the volatility in the sugar market. It also examines the question: is this the end of the gold bull market?


Dow Jones Industrial Average

As the chart below shows, the Dow Jones Industrial Average has recovered some ground from Wednesday’s selloff that continued into Thursday morning. The index broke down out of its rising trend channel but managed to close just above it.

This is the second time this month that the index has broken support intraday and although the stochastic oscillator (circled) shows that momentum is now turning to the upside, the market is definitely looking toppy.

A 40 day (60 min) chart of the Dow Jones Industrial Average (Click on the chart for a larger version)

A 40 day (60 min) chart of the Dow Jones Industrial Average (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

When sentiment among investors is this one-sided markets tend to be susceptible to violent counter-trend moves. As John Hussman put it in a recent article, “Nearly every New Years Eve and Fourth of July, you’ll read news stories about boats that capsized, often with terrible consequences. Why? Everyone was so eager to watch the fireworks that they all piled along one side of the boat. At that point, even a modest shock, like the wake of another passing ship, became enough to flip the boat over. It’s a predictable phenomenon, but tragically, people don’t seem to learn from it.

The fact is that investors would learn to avoid stocks in conditions that are measurably overvalued, overbought, and overbullish – except that in each individual case, there is always some factor that encourages investors to believe that this time is different. It’s precisely that confidence in some special factor that produces the high, and makes investors eager to join the crowd in a richly valued market, despite their knowledge that joining the crowd in a mature, strenuously overbought advance has had tragic outcomes on previous occasions.”

This is a time for caution. Once the coming 15% (approx) correction is behind us there will be a much better time to put money to work since the liquidity driven cyclical bull market in equities is likely to continue.

FTSE 100 index

While other major stock indices such as the DAX, S&P 500, etc. are within just a few percentage points of their all-time highs, the FTSE 100 index is still 9.5% below its December 1999 peak of 6,950.60.

This is likely explained by the fact that the FTSE 100 has a high exposure to commodities. About one third of the index is made up of commodity related stocks, and as we saw in last week’s article, commodities are well down from their all-time high.



Sugar is the world’s most volatile commodity market. The price of sugar reached a 20-year high of 0.3608 on 2 February 2011, but by 6 May it had lost 43%. Just a few weeks later however, it had risen 55%, and, as the chart below shows, since late August 2011 it has been in a steady decline.

A 2.5 year (daily) chart of sugar (Click on the chart for a larger version)

A 2.5 year (daily) chart of sugar (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Sugar owes much of its volatility to the fact that it is both thinly traded and heavily subsidized. Sugar is also one of the most distorted commodity markets.

As the United Nations reports, “Raw and refined sugar markets are generally characterized by significant and widespread domestic support and trade distorting policies, such as guaranteed minimum payments to producers, production and marketing controls (quotas), state-regulated retail prices, tariffs, import quotas and export subsidies… The market remains particularly susceptible to large demand swings and price volatility.”

From the perspective of trend followers the volatility in the sugar market has made it one of the most profitable commodities in recent years.

Precious metals

Gold: Is this the end of the gold bull market?

The chart below shows the price of gold going back 15 years to 1998. It also shows the RSI or relative strength index, a momentum oscillator that measures the velocity and magnitude of directional price movements.

RSI is considered overbought when above 70 and oversold when below 30.

The 14-day RSI on gold has only dipped below 30 eight times during this entire bull market, and the last time gold was as oversold as it was on Wednesday was in June 1999, right at ‘Brown’s Bottom’, the point at which Gordon Brown decided to sell almost 400 tons of Britain’s gold.

A 15 year (daily) chart of gold (Click on the chart for a larger version)

A 15 year (daily) chart of gold (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

As mentioned before, the bull market in gold is actually a bear market in paper currencies. Therefore, if gold’s bull run has actually come to an end, it would suggest that the world’s major currencies such as the US dollar, the euro, the Yen and the British Pound, have stabilized and are no longer in decline.

If that is the case then why are the financial pages filled with talk of another currency war?

The fact is, paper currencies are more unstable than ever. As Warren Buffett pointed out in his annual report, “the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time.”

Buffett stresses the point that investment such as money-market funds, bonds, mortgages, bank deposits, that “are thought of as ‘safe’, are among the most dangerous of assets. Their beta may be zero, but their risk is huge”.

He goes on to say that “Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.”

We can be confident that now is just such a time. We can also be confident that the smart money is buying gold right now, not selling it.

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